Macroeconomic Policy Revision - Monetary Policy

Following up from my fiscal policy revision notes, these are notes I made on monetary policy. Again, apologies for the last diagram - I couldn't find it anywhere on the internet so had to make half of it in Paint... :P I think these notes are fairly comprehensive but please say something if you think of anything that could be added.

Macroeconomic Policy Revison Notes - Monetary PolicyDefinition: Managing the economy via the use of interest rates and the money supply.Framework: Government sets the target for monetary policy to achieve in terms of inflation rate (currently2.0% CPI +/- 1.0%). The Bank of England's Monetary Policy Committee (MPC) has responsibility for meetingthis target for inflation, altering interest rates and/or the money supply (through quantitative easing) in orderto influence CPI 18-24 months ahead.Expansionary Monetary Policy: (Decreasing interest rates and/or increasing the money supply to boostAD) 1) Decreasing Interest rates: Has the effect of increasing consumption as the incentive for people to save falls due to a reduced return from their savings. Also, the repayment costs of variable rate mortgages will be reduced meaning household's disposable discretionary income will be increased meaning consumption will rise. Consumption also rises due to the fact the consumer borrowing becomes cheaper, so consumers are likely to spend more on consumer durables (such as cars). Decreased interest rates also effect investment, as the cost of borrowing for firms decreases. This makes capital investment more profitable, which makes firms more likely to do it. The decrease in interest rates will decrease the attractiveness of the Pound to foreign investors, and therefore will decrease the flow of 'hot money' into the UK. This will have the effect of reducing the demand for the £,causing it to become weaker. This weakening of the currency will increase the international competitivenessof our exports (W.P.I.D.E.C), and they will subsequently increase, causing an increase in AD.2) Increasing Money Supply: This means banks have more money to loan to consumers and businesses andtherefore, makes them more likely to lend money. This increases both consumption and investment as fundsare now more readily available.Contractionary Monetary Policy: (Increasing interest rates and/or decreasing the money supply to reduceAD) 1) Increasing Interest rates: Has the effect of decreasing consumption as the incentive for people to save rises due to an increased return from their savings. Also, the repayment costs of variable rate mortgages will rise meaning household's disposable discretionary income will be decreased meaning consumption will fall. Consumption also falls due to the fact the consumer borrowing becomes more expensive, so consumers are likely to spend less on consumer durables (such as cars). Raised interest rates also effect investment, as the cost of borrowing for firms increases. This makes capital investment less profitable, which makes less more likely to do it. The increase in interest rates will decrease the attractiveness of the Pound to foreign investors, and therefore will raise the flow of 'hot money' into the UK. This will have the effect of increasing the demand for the £, causing it to become stronger. This strengthening ofthe currency will decrease the international competitiveness of our exports (S.P.I.C.E.D), and they willsubsequently fall in quantity, causing a fall in AD.2) Decreasing Money Supply: This means banks have less money to loan to consumers and businesses andtherefore, makes them less likely to lend money. This decreases both consumption and investment as fundsare now less readily available.